Bullard Plays Down Credit Crunch, Says Fed Must Fight Inflation

(Bloomberg) -- Federal Reserve Bank of St. Louis President James Bullard said steps taken to ease financial strains were working and the central bank should keep raising interest rates to fight high inflation. 

“Financial stress seems to be abated, at least for now,” Bullard told reporters Thursday after speaking at an event in Little Rock, Arkansas. “And so it's a good moment to continue to fight inflation and try to get on that disinflationary path.”

The St. Louis Fed chief said he doesn't think tighter credit conditions stemming from the recent banking turmoil will be substantial enough to tip the US economy into recession, noting that demand for loans is still strong. 

While financial conditions have become tighter, Bullard said the stresses are low compared to what was seen during the 2007-2009 financial crisis. He said the Fed's efforts to calm financial strains by introducing a new lending facility for banks appear to be working.  

“Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation,” Bullard said at an event hosted by the Arkansas State Bank Department.

Fed officials lifted interest rates by a quarter percentage point last month, maintaining their aggressive yearlong campaign to curb price pressures despite financial stability concerns following the second-largest banking collapse in US history.

The move took their policy benchmark to a target range of 4.75% to 5%, up from near zero a year earlier. Forecasts released at the same time showed the 18 officials expected rates to reach 5.1% by year-end, according to their median projection, implying one more interest-rate increase. 

“I do think we should continue to pursue our interest rate path and make sure that we get the disinflation to occur in 2023 and 2024 so that we put the inflation problem behind us while the labor market is still strong,” Bullard said after the event.

Bullard, who does not vote in monetary policy decisions this year, said last month that his own forecast was for rates to peak at 5.625% this year. Officials next meet May 2-3.

“I think inflation's going to be sticky going forward and it's going to be hard to get inflation back down to the 2% target,” he said during the event. “So we're going to have to stay at it.”

The policymaker said a recent sharp drop in bond yields will help ease headwinds for the US economy stemming from recent turmoil in the banking sector. 

He noted during his presentation that yields on 10-year US Treasuries have fallen 50 basis points in the past few weeks, and by 100 basis points for two-year notes.

“This may help to mitigate some of the negative macroeconomic fallout that might otherwise occur in the aftermath of a period of financial stress,” Bullard said.

(Updates with Bullard comments starting in first paragraph)

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